$HRBR Risk Factor changes from 00/04/03/23/2023 to 00/10/24/24/2024
ITEM 1A. RISK FACTORS Our success is subject to numerous risks and uncertainties, many of which involve factors that are difficult to predict or beyond our control. RISK FACTORS Our short and long-term success is subject to numerous risks and uncertainties, many of which involve factors that are difficult to predict or beyond our control. As a result, investing in Harbor’s common stock involves substantial risk. Harbor’s stockholders should carefully consider the risks and uncertainties described below, in addition to the other information contained in or incorporated by reference into this Annual Report, as well as the other information we file with the SEC from time to time. If any of these risks are realized, our business, financial condition, results of operations, liquidity and prospects could be materially and adversely affected. In that case, the value of Harbor’s common stock could decline, and stockholders may lose all or part of their investment. Furthermore, additional risks and uncertainties of which we are currently unaware, or which we currently consider to be immaterial, could have a material adverse effect on our business. Certain statements made in this section constitute “forward-looking statements,” which are subject to numerous risks and uncertainties including those described in this section. For additional information, please refer to “Cautionary Note Regarding Forward-Looking Statements” in this Annual Report. For additional information, refer to “Cautionary Note Regarding Forward-Looking Statements” within this Annual Report. Risks Related to Our Business Air Wisconsin may continue to experience difficulty hiring, training and retaining a sufficient number of qualified pilots and mechanics, which may negatively affect Air Wisconsin’s operations and our financial condition. Historically, the supply of qualified pilots to the airline industry has been limited, which has created difficulty hiring, training and retaining a sufficient number of qualified pilots. Historically, the supply of qualified pilots to the airline industry has been limited, which has created difficulty hiring, training and retaining a sufficient number of qualified pilots. In July 2013, the FAA issued stringent pilot qualification and crew member flight training standards, which increased the required training time for new airline pilots (the “FAA Qualification Standards”), and the FAA also mandated stricter rules to minimize pilot fatigue, increasing the number of pilots required to be employed for Air Wisconsin’s operations and correspondingly increasing Air Wisconsin’s labor costs. In July 2013, the Federal Aviation Administration (the “FAA”) issued stringent pilot qualification and crew member flight training standards, which increased the required training time for new airline pilots (the “FAA Qualification Standards”), and the FAA also mandated stricter rules to minimize pilot fatigue, increasing the number of pilots required to be employed for Air Wisconsin’s operations and correspondingly increasing Air Wisconsin’s labor costs. During the first two years of the COVID-19 pandemic, for many reasons, such as reduced flying opportunities, early retirement benefits offered by some airlines, travel restrictions and COVID-19 vaccine mandates, many pilots decided to retire or seek employment in other industries. During the first two years of the COVID-19 pandemic, for many reasons, such as reduced flying opportunities, travel restrictions and COVID-19 vaccine mandates, many pilots decided to retire or seek employment in other industries. As passenger demand for air travel has increased, Air Wisconsin and other airlines have experienced challenges hiring and maintaining sufficient numbers of qualified pilots due to that attrition as well as historical factors, including the increased flight hour requirements under the FAA Qualification Standards and the statutory mandatory retirement age of 65. However, as passenger demand for air travel has increased, Air Wisconsin has experienced challenges hiring and maintaining sufficient numbers of qualified pilots due to a number of factors, including the increased flight hour requirements under the FAA Qualification Standards, the statutory mandatory retirement age of 65, and attrition resulting from voluntary retirement decisions. Air Wisconsin has also experienced challenges with pilot attrition to other airlines. In addition, now that Air Wisconsin is no longer flying for United, United could increase the number of Air Wisconsin pilots it hires, which could restrict the number of flights Air Wisconsin can fly for American. The pilot shortage is particularly critical at the captain level. Air Wisconsin has historically expended significant resources to recruit and train pilots, including as a result of recent significant upward pressure on pilot compensation at certain regional airlines and limited availability of flight simulators and instructors. As part of the collective bargaining agreement Air Wisconsin entered into with its pilot group in October 2023, Air Wisconsin has increased its pilot compensation substantially, but it continues to evaluate the pilot market and may continue to experience additional cost increases in the future. Since the American capacity purchase agreement does not require an increase in the amounts paid to Air Wisconsin as Air Wisconsin increases the amount of pilot compensation, these increases could have an adverse impact on our financial condition and operating results. Since neither United nor American is required to increase the amounts it pays to Air Wisconsin as Air Wisconsin increases the amount of pilot compensation, these increases could have an adverse impact on our financial condition and operating results. 17Table of ContentsUnder the American capacity purchase agreement, American is required to pay Air Wisconsin a fixed amount each month for each covered aircraft. However, no monthly payment is required for aircraft that do not meet certain minimum block hour utilization thresholds, and in certain circumstances American can elect to remove those aircraft from coverage under the agreement. Accordingly, if Air Wisconsin is not able to hire and retain a sufficient number of pilots, it will not receive compensation for all aircraft otherwise covered by the American capacity purchase agreement and it may suffer a reduction in the number of aircraft covered by the agreement, either of which could have an adverse impact on our business and operations. If the estimated residual value of any of our aircraft, engines or parts is determined to be lower than the residual value assumptions used in our depreciation policies, the aircraft, engines or parts may be impaired and may result in a material reduction in their book value or we may need to prospectively modify our depreciation policies. Air Wisconsin has also recently experienced difficulty hiring and retaining qualified mechanics to service its aircraft, due to a variety of factors, including voluntary retirement decisions, decisions not to return after furloughs during the COVID-19 pandemic, decisions to leave the airline industry, and the hiring needs of other airlines. Air Wisconsin has also recently experienced difficulty hiring and retaining qualified mechanics to service its aircraft, due to a variety of factors, including voluntary retirement decisions, decisions not to return after furloughs during the COVID-19 pandemic, and the hiring needs of other airlines. There is also a risk that more mechanics may decide to leave the airline industry. There is also a risk that some mechanics may have decided to leave the airline industry or may decide to do so in the future. Air Wisconsin has increased its mechanic wages, along with offering other hiring incentives, and may continue to experience additional cost increases in the future. Air Wisconsin recently increased its mechanic wages along with offering other hiring incentives and may continue to experience additional cost increases in the future. If Air Wisconsin is unable to hire and retain a sufficient number of qualified mechanics, it could have an adverse impact on our business and operations. If future pilot or mechanic attrition rates outpace Air Wisconsin’s ability to hire and retain qualified pilots and mechanics, Air Wisconsin may need to continue to increase its labor costs to attract and retain sufficient qualified pilots and mechanics, which would negatively impact our operating results. Air Wisconsin may also be required to reduce the number of block hours flown under the American capacity purchase agreement, which would reduce our revenues and possibly trigger the payment of performance penalties. Our business is highly dependent on the American capacity purchase agreement because American is now Air Wisconsin’s sole airline partner. Prior to March 2023, we derived nearly all of our operating revenues from the United capacity purchase agreement because United was Air Wisconsin’s sole airline partner. Air Wisconsin ceased flying for United in early June 2023. Since then, we have derived nearly all of our operating revenues from the American capacity purchase agreement as American is currently Air Wisconsin’s sole airline partner. Prior to March 2023, we derived nearly all of our operating revenues from the United capacity purchase agreement because United was Air Wisconsin’s sole airline partner, accounting for approximately 99. Pursuant to the American capacity purchase agreement, American is permitted to terminate the agreement or remove aircraft that would otherwise be covered under the agreement prior to the expiration of its term in certain circumstances, including upon Air Wisconsin’s material breach of the agreement, Air Wisconsin’s inability to operate a certain number of aircraft, Air Wisconsin’s failure to meet certain operating performance benchmarks for specified periods and certain changes of control of Air Wisconsin. Pursuant to the American capacity purchase agreement, American is permitted to terminate the agreement prior to the expiration of its term in certain circumstances, including upon Air Wisconsin’s material breach of the agreement, Air Wisconsin’s inability to operate a certain number of aircraft, Air Wisconsin’s failure to meet certain operating benchmarks for specified periods and certain changes of control of Air Wisconsin. In addition, American and Air Wisconsin each have the right to terminate the agreement for any reason after a certain date prior to the specified termination date. If American terminates the American capacity purchase agreement, our business, financial condition, results of operations and liquidity would be significantly negatively impacted, and we would need to implement significant changes to our business strategy. If American terminates the American capacity purchase agreement, our business, financial condition, results of operations and liquidity could be significantly negatively impacted, unless Air Wisconsin is able to enter into satisfactory substitute arrangements for the utilization of its aircraft. We depend on American electing to contract with us instead of operating its own regional jets or operating through its wholly owned regional subsidiaries, Envoy Air, PSA Airlines and Piedmont Airlines. We have no guarantee that American will choose to enter into new contracts with us, or renew or extend the American capacity purchase agreement, instead of operating its own regional jets, allocating flying to its wholly-owned regional airlines, or contracting with competing regional airlines. A decision by American to phase out or limit the aircraft covered by the American capacity purchase agreement, to terminate the agreement, or to enter into similar agreements with our competitors would have a material adverse effect on our business, financial condition and results of operations. During the period from the withdrawal of an aircraft from the provisions of the United capacity purchase agreement until it becomes covered by the provisions of the American capacity purchase agreement, that aircraft will not generate revenues from either United or American. Any events that negatively impact the financial or operating performance of American could have a material adverse effect on our business, financial condition and results of operations. Any events that negatively impact the financial or operating performance of American could have a material adverse effect on our business, financial condition and results of operations. American could be materially and adversely impacted, directly or indirectly, by new variants of COVID-19 or other infectious diseases, worldwide political or economic changes or instability, including those associated with the outbreak of war or hostilities, government sanctions, travel restrictions, rising fuel and other commodity prices, currency exchange rate fluctuations, increasing interest rates and inflation. American could be materially and adversely impacted, directly or indirectly, by new variants of COVID-19 or a long-term COVID-19 pandemic or other infectious diseases, by worldwide political or economic changes or instability, including those associated with the outbreak of war or hostilities, government sanctions, travel restrictions, rising fuel and other commodity prices, currency exchange rate fluctuations, increasing interest rates and inflation. If American were to experience significant financial difficulties as a result of these or other reasons, it could negatively impact American’s ability to meet its financial obligations under the American capacity purchase agreement or alter its business strategy as it applies to regional airlines. Further, if American were to become bankrupt, the American capacity purchase agreement may not be assumed in bankruptcy and could be terminated, and such termination would have a material adverse effect on our business, financial condition and results of operations. 18Table of ContentsDisagreements regarding the interpretation of our capacity purchase agreements could have an adverse effect on our operating results and financial condition. Disagreements regarding the interpretation of our capacity purchase agreements could have an adverse effect on our operating results and financial condition. Complex agreements, such as capacity purchase agreements, are subject to interpretation, and disputes may arise if the parties apply different interpretations to such agreements. Contractual agreements, such as our capacity purchase agreements, are subject to interpretation, and disputes may arise if the parties apply different interpretations to the agreements. It is possible that a dispute could arise with respect to the American capacity purchase agreement which could have an adverse effect on our business, financial condition and results of operations. If a dispute were to develop under the American capacity purchase agreement, that could also have an adverse effect on our business, financial condition and results of operations. Prior to the termination of the United capacity purchase agreement, a dispute arose pursuant to which Air Wisconsin claimed that United owed it certain amounts under the agreement. United denied that it owed those amounts and claimed that Air Wisconsin improperly terminated the agreement and that Air Wisconsin owed it certain amounts for the alleged wrongful termination. In October 2022, United initiated arbitration under the agreement. In October 2022, United initiated arbitration under the agreement and requested a declaration that it does not owe any of the amounts claimed by Air Wisconsin. The arbitrators denied Air Wisconsin’s claims that United owed it amounts under the United capacity purchase agreement, and they denied United’s claim that Air Wisconsin breached the agreement by terminating it and its claim that Air Wisconsin owed it damages. As a result, neither party owes to the other party any amounts claimed in the arbitration. However, the dispute required us to expend valuable management time and financial resources.Maintenance costs and delays may increase further as Air Wisconsin's fleet continues to age, and out-of-service periods may result in aircraft being unavailable for flying. Most of Air Wisconsin’s CRJ-200 regional jets were manufactured between 1999 and 2004. As Air Wisconsin’s fleet continues to age, its maintenance costs will likely increase, both on an absolute basis and as a percentage of its operating expenses.